The Producer Price Index (PPI) is unlikely to shake the pace of interest rate cuts! The financial credit dark horse Sezzle has seen its stock price double, and this sector is expected to welcome a moment of brilliance?

On Thursday, the pre-market performance of U.S. stocks was dampened by a PPI inflation report that exceeded expectations, surprising investors who were anticipating significant interest rate cuts by the Federal Reserve.

However, although the PPI data significantly surpassed expectations, traders have fully priced in a 25 basis point rate cut by the Federal Reserve in the September meeting; yet, the CME FedWatch Tool indicates that traders currently expect the probability of a rate cut in the September meeting to remain close to 95%.

U.S. Treasury Secretary Janet Yellen has also publicly stated, "The U.S. may experience a series of rate cuts starting with a 50 basis point cut in September."

Ulrike Hoffmann-Burchardi, Chief Investment Officer for the Americas and Global Head of Equities at UBS Wealth Management, anticipates that starting in September and continuing through January next year, the Federal Reserve will implement a 25 basis point cut at each meeting, totaling a 100 basis point reduction.

Rick Rieder, Chief Investment Officer for Global Fixed Income at Blackrock and a candidate for the position of Federal Reserve Chair, wrote in a report sent to clients on Tuesday that the latest economic data supports the Federal Reserve adopting an aggressive easing policy. Rieder also believes there are compelling reasons for the Federal Reserve to enact a 50 basis point cut in September.

Looking ahead to September, the most significant landmark event in the market is undoubtedly the Federal Reserve's rate cut! So, what is the market logic behind this round of rate cuts? Which assets are likely to surge first after the rate cut, becoming the preferred choices for winners? This article will comprehensively analyze the market logic behind the Federal Reserve's rate cuts and explore related investment opportunities for mooers.

What is the market logic behind this round of rate cuts?

From September to December 2024, the Federal Reserve is expected to implement three consecutive rate cuts, totaling a reduction of 100 basis points. However, since the beginning of this year, the pace of rate cuts by the Federal Reserve has been put on hold, reflecting the current dilemma faced by the Federal Reserve regarding rate cuts: whether to prioritize preventing an economic recession or preventing a rebound in inflation.

According to reports from First Financial, the Chief Industry Research Institute of Guangkai believes that the Federal Reserve has maintained a rather hawkish atmosphere in the first half of this year. However, since entering July, there has been a significant shift. At the monetary policy meeting held at the end of July, Fed governors Bowman and Waller explicitly cast dissenting votes, marking the first occurrence since 1993 of two Fed governors voting against at the same meeting.

Given that the Federal Reserve has not eliminated concerns about a rebound in inflation, even if the Fed initiates a second phase of rate cuts in September this year, it will still be a preventive measure, which may manifest in the following specific ways: First, the initial rate cut is likely to be 25 basis points. Second, there may be 2-3 rate cuts within the year, with a cumulative reduction of 50-75 basis points. Third, the rate cut cycle could last until 2026.

The institution also stated that monetary policy is flexible and adaptable; when there are significant changes in inflation, employment, growth, and the market—especially regarding whether the lagging effects of tariffs will fully manifest starting in the fourth quarter of this year—monetary policy will swiftly adjust in the short term, and will not hesitate to change direction if necessary. At this point, it is possible that the rate cut process could be halted immediately or significantly accelerated.

Which assets are likely to surge first after a rate cut and become the preferred choices for winners?

Historical data indicates that although rate cuts narrow the net interest margins of banks and financial institutions, their impact is far from limited to this. In fact, the core effect of rate cuts is to significantly boost loan demand, thereby providing strong support to the financial sector.

Firstly, rate cuts significantly lower the cost of capital, directly stimulating the borrowing willingness of businesses and individuals. Particularly in the early stages of economic recovery, expanding industries and startups typically exhibit strong financing needs to support business growth. The decrease in borrowing costs creates favorable financing conditions, subsequently driving the expansion of loan operations by financial institutions. Among them, fintech companies, with their efficient service models, can respond quickly to such demand, highlighting their competitive advantages.

Secondly, the economic recovery is accompanied by a rise in consumer credit demand. Innovative credit models such as "buy now, pay later" (BNPL) are especially favored during the rate cut cycle. This model lowers the barriers to consumption and provides installment payment options, effectively stimulating consumer potential. Furthermore, the decline in interest rates reduces the cost of installment financing, significantly enhancing the popularity and attractiveness of such products.

Therefore, with the imminent rate cuts by the Federal Reserve, financial credit stocks are expected to seize opportunities. Niu Niu has compiled a list of relevant companies in the US stock market for mooers' reference:

Among them, payment infrastructure includes Marqeta; payment systems include $Visa(V.US)$ 、 $MasterCard(MA.US)$ ; digital payment platforms include $PayPal(PYPL.US)$ 、 $Block(XYZ.US)$ ; buy now, pay later companies include $Affirm Holdings(AFRM.US)$ 、 $Sezzle(SEZL.US)$ ; consumer credit companies include $Upstart(UPST.US)$ 、 $SoFi Technologies(SOFI.US)$ 、 $OppFi(OPFI.US)$ 、 $Rocket(RKT.US)$ 、 $LendingClub(LC.US)$ 、 $Pagaya Technologies(PGY.US)$ 。

Currently, the market is closely watching buy now, pay later companies like Affirm Holdings and Sezzle; in the consumer credit sector, attention is focused on companies such as Upstart, SoFi Technologies, OppFi, and Pagaya Technologies; the largest mortgage lender in the United States, Rocket, has also gained significant popularity recently. Specifically,

The dark horse of buy now, pay later—Sezzle—has emerged as a major player in the financial payment sector of the U.S. stock market this year, with a year-to-date increase of nearly 300%. However, due to performance guidance falling short of expectations, its stock price subsequently dropped by over 30%.

$Sezzle(SEZL.US)$ This year, Sezzle has become a standout performer in the U.S. stock market's financial payment sector, with a year-to-date surge of nearly 300%. However, due to performance guidance that did not meet expectations, its stock price fell by more than 30% thereafter.

Sezzle was established in 2016, focusing on "Buy Now, Pay Later" (BNPL) services aimed at facilitating fast, secure, and convenient transactions between end customers and retailers. Its product is a short-term, interest-free installment payment plan that provides end customers with options to enhance their budgeting and financing.

As a consumer billing installment platform that allows for bidirectional selection by buyers and sellers, Sezzle offers product services to both consumers and merchants.

1. Targeting Consumers

Sezzle provides consumers with installment payment options. When shopping on the Sezzle platform, consumers can choose to pay 25% of the bill amount at checkout, with the remaining 75% paid in installments every two weeks until the total amount is settled. As long as payments are made on time within six weeks, this installment service is completely interest-free and incurs no fees.

It primarily features an "Interest-Free Four Installment Payment" service, charging no interest to users and mainly generating revenue through merchant fees. In the event of a late payment, a small late fee will be charged.

Overall, Sezzle's target users are younger individuals with shorter credit histories, inclined towards small, frequent consumption scenarios. Its customers place greater emphasis on flexible payment options and low entry barriers rather than loan amounts. Sezzle offers shorter repayment cycles, leading to high user retention, although the average transaction value tends to be low.

This also means that the company bears significantly less risk compared to credit card companies or long-term loan institutions like Klarna or Affirm.

2. Targeting Merchants

Data provided by the Sezzle website indicates that Sezzle's BNPL (Buy Now, Pay Later) system can achieve higher average order values and improved customer conversion rates on the shopping websites of its business partners. Furthermore, Sezzle assumes all fraud and default risks related to end customers, allowing sellers to receive the full amount as soon as the buyer makes the first installment payment.

Specifically, the company's business model revolves around BNPL (Buy Now, Pay Later), with primary revenue sources including transaction fees, subscription services, and merchant fees. Core products include On-Demand services (instant installment payments that serve as a gateway to guide users towards subscription products); Premium and Anywhere subscriptions (offering advanced features such as virtual cards usable at any store, compatible with Apple Pay and Google Pay, and including price comparison, discount searching, and rewards); Pay Later Anywhere (facilitating purchases at thousands of stores including Amazon, Target, and Walmart).

From the second quarter, the number of Monthly Subscribers and One-Time Purchase Users (MODS) surged to 748,000, marking significant growth compared to both the previous quarter and the same period last year. The average number of quarterly purchases per user rose to 6.1, up from 4.8 during the same period last year, indicating increased user engagement.

Leader in the Buy Now, Pay Later sector—Affirm Holdings

$Affirm Holdings(AFRM.US)$ Founded in 2012, Affirm Holdings is a financial technology company headquartered in San Francisco, USA, which went public in 2012. The primary business is to provide users with 'buy now, pay later' payment methods through partnerships with merchants, often referred to domestically as the American version of 'Huabei'. The company's stock has cumulatively risen nearly 25% this year.

Affirm primarily operates in North America, focusing on the United States and Canada, with over 98% of its revenue derived from the U.S. The company's operations extend from a no-interest or low-interest installment payment model based on BNPL to encompass various personal finance services, including savings and debit cards. The BNPL payment method, founded on trust and transparency, significantly enhances the payment experience for consumers, thereby attracting a large user base. Additionally, the company launched a comprehensive app in 2020 that includes shopping, payment, and repayment functionalities, aiming to develop it into a next-generation payment platform centered on e-commerce and mobile business models.

Affirm has two main sources of revenue: network income and interest income, which come from partners and users, respectively.

Network income: The company's BNPL payment and virtual card solutions not only bring quality customers to partner merchants and stimulate potential consumer demand but also charge a commission on orders paid using this payment method.

Distinguished from the traditional profit model of credit card companies, the firm has relinquished a portion of its interest income to attract users with a transparent repayment mechanism for a new type of loan consumption. To enhance revenue from online fees, the company has secured a substantial number of high-quality retailers willing to pay relatively higher commissions to collaborate, and it launched a debit card service in 2021.

Interest Income: This refers to the interest fees charged to users when the company provides long-term or relatively large loan products.

The essence of the company's loan products relies on a repayment mechanism based on trust and transparency, which inevitably affects interest income. The company is driving growth in interest income by expanding the categories of its products and diversifying its offerings.

Overall, Affirm primarily targets middle-to-high-income users, providing large installment services to help them avoid credit card debt. Its partner merchants are mostly large national brands with high average transaction values, particularly suited for purchasing high-value items such as electronics, fitness equipment, and airline tickets.

Upstart - An AI Lending Platform

$Upstart(UPST.US)$ Founded in 2012, the company offers high-quality credit products based on its own artificial intelligence model and cloud applications.

Upstart's core product is personal loans, primarily used for weddings, home renovations, and medical expenses, with overall loan amounts ranging from $1,000 to $50,000, and annual interest rates typically between 6.7% and 35.99%, with terms ranging from 3 to 5 years. In addition to personal loan services, Upstart also offers auto loans and home equity lines of credit (HELOC).

The company's fees are mainly composed of referral fees, platform fees, and service fees. According to the company's communication data, the proportion of fully automated loans has reached 91%, confirming the high usability of its AI model.

Morgan Stanley has raised the target price for the company to $70, but also warned investors that the company's expected price-to-earnings ratio and other valuation indicators are close to historical highs, reflecting high expectations for its growth; any further upside should be assessed with caution.

Related ETFs: $Tradr 2X Long UPST Daily ETF(UPSX.US)$

AI Loan Platform - Pagaya

$Pagaya Technologies(PGY.US)$ Pagaya is an AI loan platform. The company operates a unique B2B2C fintech platform that utilizes AI for large-scale underwriting of consumer credit.

Unlike traditional lending institutions, Pagaya neither issues loans nor holds a large portfolio of long-term loans. Its core business is to use proprietary AI models to assess credit applications, enabling seamless loan issuance through banking partners and generating profits through fee income linked to underwriting and capital market activities.

In simple terms, Pagaya adopts a "pre-issuance ABS" model: it issues asset-backed securities (ABS) to institutional investors in advance to raise funds. When traditional lending institutions (such as banks) encounter applicants with insufficient FICO credit scores, they refer them to Pagaya's AI system for secondary credit assessment. If the assessment is approved, Pagaya will use the pre-raised funds to directly issue loans. These loans are subsequently packaged into new ABS, of which 95% are sold to institutional investors, while Pagaya retains 5% (to meet regulatory requirements).

This asset-light, fee-driven, data-centric model positions Pagaya as a "technology-first enabler" in the lending ecosystem. It combines AI-driven underwriting with capital market structures to serve a dual client base: (1) lending institutions seeking better loan decision-making; (2) institutional investors seeking yield-driven consumer credit exposure.

This approach enables Pagaya Technologies to expand efficiently without incurring excessive balance sheet risk or dependence on interest income, thereby reducing the volatility of its revenue throughout the credit cycle.

This company is typically affected by interest rate cycles; under the expectations of interest rate cuts this year, the company's stock has cumulatively risen over 256%.

However, despite collaborating with mature and stable partners, the nature of some ABS loans targeting low-quality borrowers may also present risks.

Integrated Financial Platform - SoFi

$SoFi Technologies(SOFI.US)$ As a leading fintech company, SoFi Technologies has been continuously disrupting traditional financial service models since its establishment in 2011. The company has cumulatively risen nearly 60% this year.

SoFi initially focused on student loan refinancing but has since evolved into a one-stop platform offering a comprehensive range of digital financial services, covering three core businesses: lending, financial services, and technology platforms. SoFi also holds a banking license, allowing it to accept deposits and make loans, thereby combining the advantages of traditional banking with FinTech.

Notably, SoFi has actively ventured into the cryptocurrency space this year, planning to reintroduce cryptocurrency investment on its platform and launch global remittance features to facilitate cross-border remittances through blockchain processes.

Furthermore, it has not missed out on the recent trend of private equity discussions surrounding OpenAI; SoFi is collaborating with asset management companies to launch a new private market fund that allows retail investors to invest in companies such as SpaceX, OpenAI, and Epic Games.

Related ETFs: $Defiance Daily Target 2x Long SOFI ETF(SOFX.US)$

AI Lending Company — OppFi

$OppFi(OPFI.US)$ is a company that utilizes an AI-driven technology platform to provide credit services to middle-income individuals. Its core target customers are consumers that traditional banking services have failed to reach.

OppFi collaborates with community banks through its online platforms (such as OppLoans, SalaryTap, and OppFi Card) to provide short-term, high-interest loans aimed at low-income Americans with annual incomes ranging from $30,000 to $100,000. The company leverages AI and data analytics to optimize credit assessments and risk management.

Its flagship product, OppLoans, offers short-term installment loans ranging from $1,000 to $1,500 with a term of approximately 11 months. This service is designed for middle-class individuals who have bank accounts but face difficulties in obtaining traditional loans due to insufficient credit scores. Through automated approval technology, OppLoans achieves quick and convenient financing services, with its automated approval rate increasing from 72% in 2023 to 77% in 2024.

This company has doubled its annual figures this year, and although its stock price has recently declined, it has still seen a year-to-date increase of 40%.

The largest real estate mortgage company in the United States — Rocket

$Rocket(RKT.US)$ It is the largest real estate mortgage brokerage company in the United States. Its subsidiaries include Rocket Mortgage by Quicken Loans, Rocket Homes, Rocket Loans, and Rocket HQ. The company's stock has risen nearly 83% this year, primarily due to expectations of interest rate cuts benefiting the real estate and credit sectors, in which the company is a significant beneficiary.

The company is the world's first fully online mortgage lender, with loan approvals taking only 8 minutes.

Since its establishment, Rocket has fundamentally reshaped the mortgage industry through two major innovations, solidifying its leadership position.

1996: Launched the revolutionary 'Mortgage In A Box,' allowing customers to fill out and send back mortgage applications from the comfort of their homes. Within just two months, the company set a record by issuing $35 million in loans, marking a significant leap.

1999: In a decisive move to embrace online operations, Rocket sold all 28 of its physical branches and launched the rockloans.com platform.

2015: Launched the world's first fully online mortgage platform—Rocket Mortgage, a technology that is now applied to 98% of the company's home loan issuances.

Today, Rocket is once again leading industry transformation by building a fully AI-driven loan approval system, aimed at reducing human intervention and significantly enhancing efficiency.

Overall, these companies are still significantly influenced by the macroeconomic environment. If investors believe that a rate-cutting cycle is likely to begin, these companies present worthwhile investment opportunities. However, if inflationary pressures resurface and lead to further interest rate increases, the demand for consumer loans may decrease, and funding costs will rise rapidly. This will not only compress the willingness of borrowers and lenders but may also increase the difficulty for these companies to source funds for loans, weakening their transaction volumes.